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Although any case has the potential to go sideways, the appeal in K.V.G. Properties, Inc. v. Westfield Insurance Company – which involves a policyholder’s right to insurance coverage for property damaged by a third party’s marijuana growing operation – should not be cause for alarm in the cannabis industry.

As driven home by the opening briefs recently filed by both parties in the U.S. Court of Appeals for the Sixth Circuit, any potential outcome of the appeal (No. 17-2421) is unlikely to negatively affect a legitimate cannabis-related business’ right to insurance.

At issue in K.V.G. is whether a commercial landlord is entitled to coverage from its own insurer for damage done to the landlord’s property by tenants who, unbeknown to the landlord, were using the property to grow marijuana illegally. Below, the federal district court explained that “there is no evidence” that “the tenants’ marijuana operations were legal under” applicable state law.Continue Reading Should the Cannabis Industry Fear the Sixth Circuit and K.V.G.?

In a promising development for policyholders, a New York state trial court recently signaled a potential end to the free pass courts often have provided to third-party claims administrators (TPAs), such as Resolute Management, Inc. (Resolute), that has enabled TPAs to act with near impunity when handling or adjusting claims on behalf of their insurer…

The Supreme Court of Appeals of West Virginia has made it harder for policyholders to prevail on claims of common law bad faith against insurers in that state. In State of West Virginia ex rel. State Auto Property Insurance Companies v. Stucky, No. 17-0257, 2017 WL 4582607 (W. Va. Oct. 10, 2017), West Virginia’s highest court held that an insurance company cannot be held liable for bad faith regardless of its dilatory conduct, so long as it ultimately defends and indemnifies its policyholder.  As the dissent in Stucky observed, however, “[t]his over-simplified approach is myopic.”

In Stucky, the policyholder was a construction company that allegedly damaged a couple’s home.  The construction company, though, believed it “was insured for the damage to the … property under a commercial general liability policy ….”

Although the company’s insurer initially agreed “that it would handle the claim,” the insurer nevertheless allegedly “conducted a series of inspections and investigations, thereby delaying a potential settlement of the plaintiffs’ lawsuit, increasing the amount of the plaintiffs’ property damage, and resulting in the lawsuit filed against [the construction company] by the plaintiffs.”Continue Reading “Myopic” ruling limits policyholders’ ability to recover for common law bad faith in West Virginia

A recent federal court decision in “a property loss insurance case” involving the unauthorized growing of marijuana could have a negative impact on the enforceability of insurance policies sold to legitimate marijuana-related businesses. How much of an effect remains to be seen, but there is reason to think it should be minimal.

At issue in K.V.G. Properties, Inc. v. Westfield Insurance Company, No. 16-11561 (E.D. Mich. Nov. 8, 2017), was an insurer’s denial of a commercial property owner’s claim for coverage under a “commercial insurance policy.”  Certain of the property owned by the policyholder, which was intended to be “used for general office or light industrial business,” was damaged when the tenants to whom the property was rented used the property to grow marijuana.  As the court explained, growing marijuana was “an activity not authorized” by the policyholder.  In fact, the property owner was unaware that its tenants were using its property for that purpose until learning that “DEA agents executed a search warrant on the” property.

Nonetheless, the insurance company denied the property owner coverage for the damage to the property caused by that unauthorized activity.

In relevant part, the insurer relied on the “illegal/dishonest acts” exclusion in its policy, which precludes coverage for damage caused by a “[d]ishonest or criminal act by … anyone to whom you entrust the property for any purpose.”
Continue Reading Marijuana and the “Illegal/Dishonest Acts Exclusion”: Making Sense of K.V.G. Properties, Inc. v. Westfield Insurance Company

As reported extensively in the media over the past week, the cannabis industry has been hit hard by recent natural disasters. While companies doing business in this industry may face some unique challenges in purchasing insurance, and when attempting to obtain coverage for losses, insurance coverage – contrary to certain media reports – nevertheless may be available to them.  As such, cannabis-related companies should not just pass on submitting claims to their insurers when they experience losses.  Nor should they reflexively forego obtaining insurance in the first place.

Recent media reports

Both the Northern California wildfires and Hurricane Maria have caused extensive cannabis-related losses:

  • On October 13, 2017, The New York Times reported: “Fatal fires that have consumed nearly 200,000 acres in Northern California, devastating the region’s vineyards particularly in Napa and Sonoma Counties, are also taking a toll on a fledgling industry just months before its debut: recreational marijuana. Many of the region’s farms, including those that harvest cannabis, have been scorched, including those in Sonoma County and in Mendocino County, the center of California’s marijuana industry. Mendocino is one of three California counties that comprise [the] Emerald Triangle, where much of the United States’ marijuana is produced.”
  • On October 12, 2017, cnn.com reported: “Blazes have destroyed a number of farms in Mendocino County right before legal recreational sales begin in California.”
  • Also on October 12, 2017, the USA Today reported that “[m]arijuana farmers and dispensary owners across Northern California are nervously watching as wildfires burn through some of the state’s prime cannabis growing areas and destroy valuable crops ….”
  • On October 11, 2017, Marijuana Business Daily reported: “Hurricane Maria devastated Puerto Rico’s medical marijuana industry, setting back its development at least six months – if not much longer – and causing millions of dollars in damage to [medical marijuana] businesses. No outdoor marijuana cultivation facilities survived ….”

Often citing industry insiders, some of these publications have reported that insurance is not available to cover cannabis-related losses. The New York Times, for example, reported that “reliable insurance [is] difficult to acquire.”  Other publications went further, stating categorically that no insurance is available to the cannabis industry.  CNN reported:  “Cannabis cultivators cannot insure their businesses because federal law prohibits marijuana, which means that financial institutions can’t go near it.”  Likewise, the USA Today reported that “pot growers can’t get crop insurance like traditional farmers ….”
Continue Reading In Wake of Disasters, Do Not Just Assume No Coverage Available for Cannabis-Related Losses

In Rancosky v. Washington National Insurance Company, No. 28 WAP 2016, the Pennsylvania Supreme Court confirmed that, to prevail on a claim pursuant to Pennsylvania’s bad-faith statute, a policyholder does not have to prove that an insurance company acted with a “motive of self-interest or ill-will.”  While the Pennsylvania Superior Court had reached the…

Pennsylvania’s burgeoning medical-marijuana industry is and will be carefully regulated. When purchasing insurance, medical-marijuana dispensaries should pay careful attention to the Commonwealth’s regulations, in particular to the regulations relating specifically to dispensaries. Pennsylvania’s medical-marijuana regulations are only temporary, and most of them (including the ones relating to dispensaries) will expire in 2018

Certain of those regulations directly address insurance. For example, Pennsylvania requires that dispensaries “obtain and maintain an appropriate amount of insurance coverage that insures the site and facility and equipment used in the operation of the facility.” 28 Pa. Code § 1141.44(a). “An adequate amount of comprehensive liability insurance covering the [dispensary’s] activities authorized by the permit shall begin on the date the initial permit is issued by the Department and continuing for as long as the [dispensary] is operating under the permit.” Id.

Pennsylvania also requires that all dispensaries “obtain and maintain workers’ compensation insurance coverage for employees at the time the [dispensary] is determined to be operational by the Department.” 28 Pa. Code § 1141.44(b).
Continue Reading When Assessing Insurance Needs, Medical-Marijuana Dispensaries Must Consider Pennsylvania Regulations

The interpretation and application of a pollution exclusion in a commercial general liability (“CGL”) policy is often a fact-specific and jurisdiction-specific exercise. That said, the U.S. Court of Appeals for the Eighth Circuit’s recent decision, applying North Dakota law and interpreting such an exclusion in a CGL policy, should command the attention of the entire natural gas industry.

At issue in Hiland Partners GP Holdings, LLC, et al. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 15-3936 (8th Cir. Jan. 31, 2017), was an explosion at a natural gas processing facility that “receives gas and hydrocarbon products and processes them into byproducts for sale.”  Appellants, who owned and operated the facility, were an additional insured under a third party’s CGL policy.
Continue Reading Eighth Circuit pollution-exclusion opinion a cautionary tale for natural gas industry

American International Group, Inc. (“AIG”) recently announced that it entered into a significant reinsurance agreement with a subsidiary of Berkshire Hathaway Inc. (“Berkshire”). Reportedly, that agreement “covers 80% of substantially all of AIG’s U.S. Commercial long-tail exposures for accident years 2015 and prior.”  While AIG states that it “will retain sole authority to handle and…

In an encouraging development for insureds, the United States Court of Appeals for the Fourth Circuit held that a health care company’s general liability insurer was required to defend the company against claims stemming from an alleged failure to secure electronic medical records. In The Travelers Indemnity Co. of America v. Portal Healthcare Solutions, L.L.C., No. 14-1944 (4th Cir. Apr. 11, 2016), the Fourth Circuit held that the breach resulted in a “publication” of medical records, thus falling within the scope of the general liability policy issued to Portal Healthcare Solutions, L.L.C. (“Portal”).  The decision reaffirms that insureds that experience adverse cyber events are not limited to cyber-specific policies as the source of potential insurance coverage.

Portal’s insurer, The Travelers Indemnity Company of America (“Travelers”), commenced litigation in the United States District Court for the Eastern District of Virginia, seeking a determination that it was not required to defend Portal against a putative class action alleging that Portal negligently failed to secure a server hosting medical records, which resulted in those records becoming available on the Internet. Ruling on cross-motions for summary judgment, the District Court sided with Portal, reasoning that the allegations “at least potentially or arguably” alleged a “publication” of private medical information that either (a) gave “unreasonable publicity” to the patient’s private life, or (b) “disclose[d] information” about the patient’s private life.  Either circumstance triggered a coverage obligation under the Travelers policies.Continue Reading Court Upholds Coverage Under General Liability Policy for Claim Alleging Failure to Protect Data